Kospi shaken as U.S.-China trade war escalates

Aug 27,2019

The benchmark Kospi fell close to the 1,900 point on Monday, weighed down by an escalation in the U.S.-China trade conflict and discord between global leaders at the Group of 7 (G7) meeting in France over the weekend.

The Kospi ended the day 1.64 percent lower at 1,916.31, while the secondary Kosdaq slumped 4.28 percent down at 582.91. The Korean won depreciated against the U.S. dollar, rising 0.59 percent to 1,217.8 won.

Investors were spooked after China said that it would impose tariffs on $75 billion worth of U.S. goods last Friday in response to U.S. duties against Beijing. The move resulted in a 2.37 percent drop in the U.S. Dow Jones Industrial Average that day and immediate retaliatory measures from the United States.

U.S. President Donald Trump said he will raise tariffs on $250 billion worth of Chinese goods to 30 percent from the current 25 percent on Oct. 1, while duties due to be imposed on $300 billion of Chinese products from next month will also be raised to 15 percent from the original 10 percent.

Disagreement between global leaders at the G7 meeting in Biarritz, France over the weekend also set off concerns in the global economy.

British Prime Minister Boris Johnson expressed worries to Trump over expanding global trade uncertainties in a meeting on Sunday. Meanwhile, the White House maintained its hard-line stance against China, saying that Trump regretted not raising tariffs even higher.

Analysts expressed concern over the outlook on the financial markets.

“Up until now, tariff rates in the U.S.-China trade conflict were expected to be at a maximum 25 percent,” said Lee Kyoung-min, an analyst at Daishin Securities. “Trump’s latest remarks open the possibility that tariffs could rise to 50 percent, and the worsening U.S.-China trade conflict will […] have a greater negative impact on the global economy than expected.”

The uncertainties weigh on an already difficult situation for Korea, which is currently embroiled in its own trade conflict with Japan.

The two countries have removed each other from their respective lists of preferential trade partners due to a diplomatic row over a Korean court decision on forced laborers during the colonial period.

The government called for calm.

“With global risks overlapping in a short period, there’s an increasing tendency for a flight to safety in not only Korea but the broader global financial market,” said Kim Yong-beom, vice minister of economy and finance, during a meeting with senior officials on the financial markets.

The Bank of Korea lowered the key policy interest rate in July in a surprise move to help combat increasing economic woes. It will decide on rates again this month.

Increasing economic headwinds apply pressure on the central bank to further lower rates.

“We believe that the monetary policy committee [at the Bank of Korea] will lower the benchmark interest rate,” said Jeong Won-il, an economist at Yuanta Korea Securities. “With the central bank governor’s remarks that it would be difficult to reach revised targets for this year if exports worsen and facilities investment slows, it is more likely that the interest rate will be cut.”

The Bank of Korea last month downgraded its forecast for this year’s economic growth by 0.3 percentage points to 2.2 percent. Outbound shipments from Korea have recorded on-year declines for the eighth consecutive month in July.